Muni Professionals: Credit Risk Isnt Widespread

While municipal market professionals said they do not believe there is systemic risk in state and local government debt, there are underlying issues and credit challenges.

Public officials, municipal bankers, and investors Monday discussed issues facing state and local governments at the Securities Industry and Financial Markets Association’s second annual Municipal Bond Summit in Manhattan.

During his presentation, New Jersey Treasurer Andrew Eristoff highlighted Gov. Chris Christie’s pension and health care reform proposals that aim to lower retirement and health costs for the state and municipalities by passing more of those expenses onto government workers. The initiatives require legislative approval. New Jersey’s unfunded pension liability is $46.8 billion and its unfunded other post-employment benefits liability is $56 billion.

While state and local governments must tackle growing pension and OPEB liabilities, stagnant or declining revenue streams, and high unemployment, municipal market professionals said that there are individual or specific risks among state and local governments, and not a widespread weakening of credit.

“I believe there is a significant fiscal stress in the system, but I do not believe there is a systemic risk,” said Caroline Cruise, vice president of municipals at Loews Corp.

Retirement obligations and outstanding debt tend to gain a lot of attention, but Nancy Feldman, managing director at Wells Fargo Securities, pointed out that states have borrowed $40 billion from the federal government to meet unemployment compensation costs. In addition, states and municipalities have delayed infrastructure improvements, with state-of-good repair costs adding up.

Moody’s Investors Service last week changed New Jersey’s outlook to negative from stable, citing its “above-average” pension and retiree health benefit obligations as a credit challenge. Other issues — such as the state’s structural budget gap, the end of federal stimulus funds, and a projected slow economic recovery for the state — contributed to the negative outlook.

After his presentation, Eristoff told reporters that he believes the Moody’s report shows that New Jersey must reform its pension and OPEB programs to address its liabilities.

“As far as I’m concerned, it was a statement in support of what we’re trying to accomplish because they recognize that’s one of the major challenges that New Jersey faces.,” he said.

Moody’s affirmed the state’s $31.6 billion of general obligation and appropriation debt at Aa2.

To help lower $175 million of debt-service costs this year, the state Thursday is set to issue $664.5 million of GO refunding debt that will push those expenditures out to future years.

The state is also working on a $1.43 billion Transportation Trust Fund Authority deal that will including $950 million of new-money debt to help finance road, bridge, and mass-transit needs through March.

Eristoff said the TTFA transaction should price in mid-October, but before it heads to market the Legislature’s Joint Budget Oversight Committee will weigh in on the sale, as it includes debt restructuring. Officials have yet to announce a date for that committee meeting.

The transaction is market-sensitive since it requires restructuring debt to open up borrowing capacity in this current fiscal year. Any holdup in the Legislature could cost the state if it cannot access the market at an ideal time.

“I understand that there have been some movement in rates, but I don’t think you would want me or any other treasurer to chase interest rates around,” Eristoff told reporters after his speech. “We should be calm and deliberate in terms of structuring how we access the capital markets.”